Markets predict Supreme Court will overturn health care law, but uncertainty is high

Today, the nine Supreme Court justices will cast preliminary votes on the fate of the Affordable Care Act. The result, which can change over the coming weeks as the justices prepare and exchange opinions and dissents, will not be announced to the public until June, but the political markets are doing business trading shares on one of the key questions: Whether the court will strike down the heart of the legislation, which requires most Americans to purchase health insurance or pay a penalty.

The latest forecasts give 62.8 percent odds that the Supreme Court will strike down the so-called individual mandate. But there is less precision in this forecast than we see in elections. When the Signal creates forecasts for who is going to be the next president, we can use multiplepredictionmarkets, polls, and fundamental data. We have a track record of how this data has worked in the past, so we can calibrate forecasts based on those historical correlation. There are no polls of Supreme Court justices and a good deal of uncertainty in the one market taking action on the outcome.

That prediction market, Intrade, betrays its uncertainty by the wide variety of prices people are willing to pay for or sell a contract on the odds. In markets with high certainties where people are confident in the information they have, like elections, the price of placing a bid is within a small range of the overall price. In this case, we see a range in prices that is 4.75 times larger than the distance between buyers and sellers in the market on Obama's odds of reelection. Even people with the highest amount of information are uncertain of the outcome.

Because the measure is Obama's signature domestic accomplishment, many people are more interested in the impact the decision has on politics than it has on healthcare. We'll see how Obama's odds of reelection move when the decision comes out. It's not a foregone conclusion what this relationship will be--there are those who argue that the having the law overturned will benefit Obama by relieving his campaign of a political liability. But I am not personally that interested in the effect of healthcare on the election. I am more interested in the effect of the election on healthcare.

This is because--if I may replace my economist hat with an analyst hat for a moment--I believe the individual mandate is a fundamentally conservative idea that is masquerading as a liberal one in this election.

There are three choices for how to respond to the uninsured when they require health care. The first is to let them die if they are faced with catastrophic medical costs. We as a country have deemed that unacceptable, so we allow people in this situation to receive emergency care which, if they cannot afford it, is ultimately paid for by the insurance companies in the form of higher fees charged by the hospitals in order to absorb these costs. That means the cost ultimately is born by the insured. Second, we can raise taxes and have the government pay for insurance, which conservatives of course do not like. Third, we can find a private solution, like the individual mandate, that provides for full insurance coverage, but does not rely on government taxes. This raises the number of healthy people on insurance, which allows the system to accommodate higher-cost customers--the basic concept behind market-based insurance.

David Rothschild is an economist at Yahoo! Research. He has a Ph.D. in applied economics from the Wharton School of Business at the University of Pennsylvania. Follow him on Twitter @DavMicRot and email him at thesignal@yahoo-inc.com.